How to profit from a Downtrending sto...

How to profit from a Downtrending stock market?

Posted in the Business News Forum

Since: Jun 13

India

#1 Jul 29, 2013
In general, the first step in the analysis of any company is typically to evaluate the fundamentals to validate that the long-term potential is good. Once you've done that you can feel more confident that pullbacks are opportunities. Here is one trading example that could be considered:

Ticker: SH (ProShares Short S&P 500).

While buying the shares outright (alone), the trade could profit from a falling stock market only.

But what if the stock began to trade sideways as a result of the S&P 500 trading sideways or in a range?

Enter a covered call.

Here is an example:
Buy 100 shares of SH at $29.50 (today's intraday price).
Sell to open [1] July $30 short call for a credit of $0.40 per share.
Net Debit:$29.50 -$0.40 =$29.10 (max risk)
Max Reward:$30.00 -$29.10 =$0.90
Trade potential: 3.09% return on risk in 37 days.

By structuring a covered call, even if the stock finishes right at where it was purchased, the short call credit of $0.40 would still be a profit. And, if the stock rises, a slightly larger profit could be had as well.

Now, if the expectation was for the S&P 500 to trend down dramatically, just holding SH shares would have a larger pay off as well. To explore more visit us at "markettamer"

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